National Association of Home Builders Discusses Economics and Housing Policy

Property Tax Collections Reach Nominal High

During the last four quarters, state and local government property tax collections reached a historic high on a nominal dollar basis, according to the latest data from the Census Bureau. From the second quarter of 2012 through the end of the first quarter of 2013, approximately $478 billion of tax was paid by property owners. This exceeds the previous trailing four-quarter record of $476.5 billion, set at the end of the third quarter 2010.

Property taxes are an important source of revenue for state and local governments to finance services, particularly education. Some analysts expected large declines in property tax collections in the wake of the Great Recession. However, this drop never happened, despite historic price declines for owner-occupied housing. At its peak, property tax collections had fallen only 2.26%.

As state/local income and corporate tax receipts recovered in recent years, the share of local tax collections due to property taxes fell from recession highs. The average share for property taxes since 2000 is 32.3%, while the current share stands at 33.6%.

The decline in housing prices since 2006 led many to incorrectly conclude that property tax payments would also significantly fall. According to the Case-Shiller national house price index, with the recent rebound in values, housing prices are down on net 26% over the last six years. Yet property tax collections have actually risen. While the stock of taxable real property has increased, the disconnect between the decline in values and total taxes paid means that the effective tax homeowners pay on their homes remains high.

There are several reasons why property taxes have not dropped with housing values. First, assessments of value tend to lag. Second, property tax authorities can adjust tax rates (such as millage rates in many jurisdictions) thus increasing rates as property values decline, holding receipts approximately constant. However, such policy actions mean the effective rate of tax (taxes paid divided by the property value) on the property increases.

Taxes paid by homeowners and other real estate owners remain the largest single source of revenue for state and local governments. At 34%, property taxes represent a significantly larger share than the next largest sources: individual income taxes (23%) and sales taxes (21%).

* Data footnote: Census data for property tax collections include taxes paid for all real estate assets (as well as personal property), including owner-occupied homes, rental housing, commercial real estate, and agriculture. However, housing’s share is by far the largest when considering the stock of both owner-occupied and rental housing units.